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Independent System and Market Operator (ISO)

Independent System and Market Operator (ISO). Outline of Presentation. The Conundrum What is an ISMO? ISMO Functions ISMO Logic Phases to ISMO Impact on Stakeholders Possible end state for South Africa Experiences elsewhere. 2. The Conundrum.

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Independent System and Market Operator (ISO)

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  1. Independent System and Market Operator (ISO)

  2. Outline of Presentation The Conundrum What is an ISMO? ISMO Functions ISMO Logic Phases to ISMO Impact on Stakeholders Possible end state for South Africa Experiences elsewhere 2

  3. The Conundrum SA urgently needs new generation capacity and, in turn, Eskom needs Scarce Government capital to fund new projects Tariff increases that have social and industrial impact Additional Debt that have, as prerequisite, a viable ESI to repay them Minimizing Government exposure requires Mobilizing private sector funding The private sector, in turn, needs a level playing field and clarity of rules Minimizing inevitable tariff increases requires Reducing overall sector risk with correct allocation of risks and reward Better allocation of resources with correct electricity pricing signals A viable ESI requires The benefits that accrue with competition Unleashing of enterpreneurial agility Superior Technological Innovation and Know-how in RE and Traditional Fuels Access to New Financial Resources beyond the Government 3

  4. What is an ISMO? Acronym for “Independent System and Market Operator” “Independent” = Autonomy of ISMO from its key stakeholders “System” = National Electricity Transmission System “Market” = Buying of electricity from electricity generators and Selling thereof to customers at a wholesale level ISMO = Owner/Operator of National Electricity Transmission System who buys electricity from generators and sells it to customers at a wholesale level 4

  5. ISMO Functions • ISMO, an autonomous state owned company, mandated to execute the following functions • Generation Resource Planning • Transmission Service and Implementation • Buyer • System Operations and Expansion Planning • A package empowering ISMO as an “honest broker” wholesale electricity buyer, a role Eskom, as generator, can never play. • A message for the market to know that responsibility to meet these obligations rests with ISMO

  6. ISMO Logic • Key among IRP objectives are • usher in a new era of IPPs, • diversify into Renewable Energy sources, and • establish the associated enabling policies • IPPs will not mobilize unless system promotes • equitable access to grid for all participants, • predictability of all costs and risk allocation principles, • policies that enhance enabling environment for IPPs, • regional cooperation Bias can not be eliminated unless an autonomous entity is set up to deal with these issues and the playing field is levelled.

  7. ISMO establishment • Legislate ISMO (4 Months) • An ISMO shell as a “Peg on the Ground” • Clarity and comprehensiveness of 4 ISMO functions • Autonomy over 4 ISMO functions • Fast track legislation / populate assets over time • Investors can relate to and buy into this • Populating ISMO (2 Years) • Transfer assets, rights, obligations, contracts, staff • Data, time and effort intensive due diligence process • Sub-phases of transition • Single Buyer and generation resource planning • System Operations and Expansion Planning • Responsibility with ISMO and under ISMO autonomy • Subcontracting to Eskom for transition until full transfer of above • Operationalizing ISMO • Full fledged performance of all 4 functions by ISMO staff • Evolution into further market based modalities (willing buyer-willing seller) • Discussions about independence of the transmission assets

  8. Legislation = “Peg on the Ground”(Draft Bill open for Comments and then to Parliament) An unequivocal, urgent, and transparent message that the Government is determined to source power from IPPs and it is taking decisive action to put in place the necessary enabling framework for IPPs to operate in, ensuring efficiency, accountability, and transparency. Not intent, not cooperative approache, not even contractual arrangements open to interpretation, but enabling legislation that sets the scene for things to come and tells would be IPPs “if you want to be in, start spending to develop your projects, it will be a fair level play field.”

  9. Unknowns are not of “Spin-off” but already Exist • Financial creditworthiness of ISMO will depend on (a) Regulated bulk supply tariffs to cover cost of ISMO operations, and (b) Ability of its customers to pay the regulated bulk supply tariffs. • This credit risk is no different than if Eskom was contracting with the IPPs, as cash-flow is from the same customer base. (a) With ESKOM, as an integrated operation, the cause of any problem is less transparent. (b) With ISMO, reason will be transparent (inadequate tariffs, or non-paying customer.) • Current Government support to maintain and expand infrastructure is due to a lack of financing through normal operations. • Establishing ISMO will not change inadequacy of funding nor make it worse, but it will make the funding shortage more transparent. • There will continue to be subsidies at distribution, with decisions on whether to cross subsidize within sector or with outside funds, and to what extent.

  10. There is a Better Way with ISMO • IPPs will lift a substantial burden off Government’s coffers • Demand for present 40,000MW capacity might double in 20 years • Some of the installed capacity needs to be replaced • If IPPs bring at least 30% of future capacity, that’s 24,000MW Government need not finance • The proposed regime will reduce risk premiums • ISMO will not need subsidies if tariffs are set to self finance its operations • Competitive ISMO-generator PPAs will allocate risk more predictably • Sector costs will be reflected in new transparent pricing between ISMO-generators and between ISMO-customers • IPPs will price PPAs with ISMO at lower risk premium than with Eskom, due to absence of inherent conflict of interest in contracting process • Cost recovery based pricing combined with better risk mitigation should reduce level of guarantees needed • As a result, Government will not be faced with unquantified risks, as shareholder of a state-owned enterprise responsible for its own building program (e.g. cost overruns, project delays, currency risk)

  11. Impact on Government • An asset split along mutually exclusive functions for same shareholder • Assets packaged for more efficient operation under same shareholder • Separation of businesses that ordinarily should be at arm’s length • Specialization in services • Transparency in pricing • Diversity of Business Models • Accountability of Quality • More competitive and self-reliant Eskom in generation • More competitive and self-reliant functions under an autonomous ISMO

  12. Impact on IPPs • IPPs have not been forthcoming in significant volumes • Perception of conflict of interests in vertically integrated Eskom • Perception that Government is not serious about industry reform • Perceptions about long-term viability of present ESI structure • Lack of enabling legal/regulatory framework to facilitate IPPs • ISMO is key in facilitating introduction of IPPs • Inclusiveness, Transparency, Accountability for level play field in Planning/Dispatch • Transparency in governance and decision making • No conflicts of interest as both player and referee • Benefits of competition in the generation sector • Objective purchase/sale of electricity in the best interests of the country • Correct risk allocation and pricing

  13. Impact on Other Eskom Stakeholders • Clients : • Increased reliability of service • Suppliers : • Increased demand for goods and services in an expanding sector • Staff : • Same functions reorganized under two new houses • Possible short term job creation in in-house support functions • Certain long term job creation in an expanding sector

  14. Possible end state options for South Africa

  15. As Is ESKOM HOLDINGS PROD TRANS RETAIL WIRES Gn1… Gn1…. KSACS DX Gn2… GnX… Imports Imports SO National Control Wholesaler IPP’s Single Buyer REFIT Dispatch Trading (Aggregation) MW Flow

  16. System Operator as subsidiary of Eskom ESKOM HOLDINGS PROD TRANS RETAIL WIRES Gn1… Gn1…. DX Gn2… GnX… Imports Imports SO (Subsidiary of Eskom Holdings) National Control KSACS Wholesaler IPP’s Single Buyer REFIT Planning Dispatch Trading (Aggregation) MW Flow

  17. System Operator as an Independent Entity ESKOM HOLDINGS PROD TRANS RETAIL 70% WIRES Gn1… Gn1…. DX Gn2… GnX… National Control Imports Imports SO (State Owned Entity) Planning 30% Wholesaler IPP’s Buyer REFIT KSACS Dispatch Trading (Aggregation) MW Flow

  18. TURKISH EXPERIENCE ON RESTRUCTURING The Vertically Integrated Utility Model (Until 1994) The Central Buyer Model(1994- 2001) Unbundling (2001 – ) New Generation - EUAS or IPP Built New Generation - TEAS or IPP (BOT, BOO) Built New Generation - TEKand BOT Built Suppliers(Generators, Marketers) EUAS Electricity Generation Company State Owned IntegratedUtility (Turkish Electricity Company- TEK) Existing Generation(Regulated) Generation Only the Integrated UtilityTEAS can buy Energyfrom generators. System Operator and Market Operator TEIAS Turkish Electricity Transmission Company Transmission and Operations Transmission and Operations Only the integratedUtility TEAS can sell energy to TEDAS, Kayseri and Aktas. Distribution Transmission Owner Integrated Utility TEK and 2 concessionary companies can sell energy to consumers. TEDAS Turkish Electricity Distribution Company Distribution Utility TEDAS (State owned Distribution & Retail Company) Consumers Consumers Consumers

  19. Thank you

  20. Appendix What are the international trends?

  21. Thailand model • Current: EGAT (similar to Eskom) remains vertically integrated with no ISO, yet IPPs contribute 55% of generation capacity; EGAT not directly involved in distribution • Learnings: • Different requirements for very small IPPs (e.g. no tendering but selection criteria, and sell directly to distributors in accordance with the approved tariff • Government promulgates tariffs for the different IPPs, but provides financial support to EGAT to make up shortfalls • Tariffs slightly high with step tariff for domestic customers and Time of Use for large customers • Tariffs are the same through out the country with cross subsidies across distributors • PPAs were structured to cater for all the concerns raised by the IPPs (i.e. high level of risk taken on by government / EGAT) hence there was less concern re the regulatory framework

  22. VSPPs (1%) EGAT (44%) IPPs 42 Import 3% SPPs 10% Gov NEPC Government Policy and Tariff approval National Transmission EGAT (100%) System Operator PEA (66%) MEA (32%) Customers (2%) Regulator Implement Energy Industry Act Customer Customer Thailand electricity structure

  23. Thailand enhanced Single Buyer Model (ESB)‏ Key structure specifications Key structure specifications

  24. Norwegian System Operator

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